When the clock struck midnight on New Year’s Eve, venture capitalists were toasting good riddance not just to 2009 but to an entire decade in which their industry as a whole lost money for its investors.
While prominent firms such as Sequoia Capital, Accel Partners and Norwest Venture Partners still earned handsome returns and have raised new investment funds, the venture capital industry as a whole is struggling to return to positive territory.
But many venture capitalists, optimistic by nature, express confidence that they will deliver. Renewed stability on Wall Street, they say, should enable scores of startups to deliver solid returns through initial public stock offerings or an improving market for mergers and acquisitions.
IPOs and M&As — gummed up for the past two years by the recession and financial crisis — are vital cogs in the valley’s economic engine. Wall Street debuts helped turn startups such as Intel, Apple, Cisco Systems and Google into giants, while M&As enable established companies to grow by acquiring new technology and customers.
But like a gilded carriage turning into a pumpkin, the U.S. venture capital industry’s 10-year annualized return to investors has swung from positive to negative because the bubbly profits of 1999 are no longer included in the decade’s totals.
Precise data isn’t yet available, but the dismal numbers underscore the intense pressure venture capitalists are feeling from their limited partner investors.
“2010 will be the show-me-the-money year,” said Venky Ganesan, a managing director of Globespan Capital Partners in Palo Alto, summing up the attitudes of the managers of pension funds, endowments and other wealthy entities that invest in venture funds.
In a healthy economy, venture capital investors guide successful startups toward the option of either an IPO or M&A as a means of turning their equity stakes into cash. When IPOs are a viable alternative for startups, acquisitive companies like Cisco or Oracle typically pay more in M&A deals. Otherwise, it’s a buyer’s market.
The instability of Wall Street and the paucity of venture-backed IPOs in 2008 and 2009 — the Bay Area produced only three — depressed both M&A activity and prices. But in recent months, there are signs that markets are on the mend.
Two days before Christmas came the announcement of the $207 million acquisition of Jajah, an Internet-telephony startup in Mountain View, by the Spanish giant Telefónica, pending a review by Spanish authorities. Venture investors that include Sequoia Capital, Globespan and Intel Capital put $28 million into Jajah. Sequoia, an early investor, is estimated to have earned 11 times its investment — and Globespan, a later investor, about five times.
A recent survey by the National Venture Capital Association of 325 of its members found that most expect at least 26 venture-backed IPOs next year — and some expect big successes.
“Several IPOs will reach $1 billion market capitalizations or more,” predicted Pascal Levensohn, founder and managing partner of Levensohn Venture Partners in San Francisco.
Solyndra, a Fremont-based solar startup, and Codexis, a Redwood City-based maker of enzymes for biofuel and pharmaceuticals, recently filed documents with the Securities and Exchange Commission signaling their intentions to test Wall Street. High-profile startups such as Tesla Motors, Silver Spring Networks, Facebook, LinkedIn and Zynga are frequently mentioned as IPO candidates.
“Some of the key companies in the clean-tech sector will test the IPO waters in 2010,” said Ira Ehrenpreis of Technology Partners, a member of Tesla’s board. “Perhaps the more important trend,” he said, will be acquisitions by major corporations “seeking to shore up their clean-tech portfolio.”
Internet, mobile and cloud computing are also sectors to watch, VCs say. Many observers suggest that Facebook— already valued at $11 billion in private rounds — may emerge as the valley’s next publicly traded giant. Dozens of private valley companies that grew despite the recession are said to be well positioned to list on Nasdaq and the New York Stock Exchange.
Ganesan said an investment banker showed him a list of 50 such companies that are earning annual revenues of $100 million. Bankers are itching to help companies list on Nasdaq and the New York Stock Exchange — and the exchanges are eager for new business as well.
The NVCA survey found that 64 percent predicted an improved M&A market. Tech giants inside the valley such as Cisco Systems, Oracle, Hewlett-Packard and Google have been active shoppers, as are Microsoft, IBM and EMC.
Venture capital is a long-term investment — one reason why the 10-year return is most often cited in comparing the sector with stocks, real estate and other familiar benchmarks. As recently as June 20, the industry’s 10-year return was as high as 14.3 percent — but that was far below the 34 percent of just one year earlier.
Now the dazzling 83 percent return to investors during the last three months of 1999 — the industry’s best quarter ever — has rolled off the industry’s 10-year performance record. The next report, Ganesan predicted, will put 10-year losses well over 5 percent.
The long-term inclusion of data from the dot-com boom, many say, served to camouflage what former venture partner Georges van Hoegarden characterizes as the “subprime” performance of the sector in recent years.
While many valley VCs are bullish on 2010, van Hoegarden, now an adviser to limited partner investors, said he expected the sector’s overall performance to “improve moderately.”
“With a VC funding pipe stuffed with subprime investments,” van Hoegarden said, “2010 returns will remain predominantly subprime.” The venture industry as a whole, he said, will “continue to contract and lose faith with limited partners.”
Contact Scott Duke Harris at 408-920-2704.
